U.S. Interest Rate Obsession

Low U.S. retail sales, a fall in producer prices and Walmart predicting substantial losses have all led to a reduction of the continuing U.S. interest rate obsession. The Globe and Mail says that with the USD at a two month low Fed easing whispers are starting up.

The dollar fell to its lowest since August after a flurry of weak U.S. data and company results, while a two-month high for Asian indexes helped world shares bounce back in style from two days of losses.

Having been obsessed for months on when U.S. interest rates will start to rise, limp U.S. retail sales, the biggest fall in producer prices in eight months and a $22-billion hammering for the world’s biggest retailer Wal-Mart, left traders thinking maybe, just maybe, they might have to fall again.

After months of expecting a U.S. interest rate rise markets now are assuming that the Fed will not raise rates as the US economy weakens. The U.S. interest rate obsession that helped drive the dollar up is over. Or, is the U.S. interest rate obsession going to be that the Fed will try to reduce rates if that were possible. In the end it all depends on the U.S. economy.

United States Economy

As purchasing power of the U.S. consumer falls so does the pricing power of companies. The U.S. economy appears on the verge of deflation. CNBC says that consumers are shutting down.

Wednesday’s producer price index reading, showing a monthly decline of 0.5 percent, demonstrates a larger problem: At a time when policymakers are hoping to generate the kind of inflation that would indicate strong growth, the reality is that deflation is looming as the larger threat. Declining prices often would be treated as a net positive by consumers, but income weakness is offsetting the effects.

The two tools in the Fed toolbox, according to CNBC, are more quantitative easing and negative interest rates. The later would produce shocks from the markets to Main Street and into ever home in the country. The interest rate obsession of the markets is one thing but to see the world’s largest economy fall into deflation would be a socio economic shock.

Deflation

Deflation, according to Investopedia, is

a general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.

If a U.S. interest rate obsession with negative interest rates is harmful the Fed might choose to resume printing money with a quantitative easing campaign to pump more money back into the financial system and into consumer’s pockets. Otherwise consider how Japan fell into deflation that lasted a quarter of a century.